Console yourself with Churchill’s debt settlement


Never is so much owed by so much as after wars. And pandemics.

The debt burden of governments has skyrocketed over the past two years. At the end of the second quarter of this year, they collectively owed $ 86 billion, up from $ 71 billion at the end of 2019, according to the latest Debt Monitor from the Institute for International Finance.

Most of this additional borrowing was from richer countries, bringing their total debt to GDP ratio north of 130%, up from 110% before Covid.

Regular readers may know that we are not above all concerned about the magnitude of this burden. But we were interested in whether policies offered in the past can provide guidance on how to manage new liabilities.

With that in mind, an idea presented in a new article from the Adam Smith Institute piqued our interest. It is based on a tool used by none other than Winston Churchill to refinance World War I debt during his tenure as Chancellor in 1927: issuing Consols.

Consoles are ultimately a means of mitigating the risk of overturning. If they pay a bearer coupon, they don’t have a fixed redemption date. Consols issued by Great Britain to finance the Napoleonic wars were, according to the Adam Smith Institute, only reimbursed in 2014.

The think tank notes that Consols “should not be used for routine, high-cost projects, but rather for rare and unexpected emergencies like wars and pandemics that create an immediate need for large borrowing.”

Being the Adam Smith Institute, he wants the UK government to legislate specifically to convert existing Covid debt into Consol-based ’emergency Covid bonds’, with a commitment to repay when the economy recovers.

The papers here for those who want to know more.

What to do with that? We don’t generally agree with the Adam Smith Institute, but there is a lot to be done for this idea. Right now, with the debt markets being what they are, why not lock in ultra-low financing costs for future generations, rather than having to refinance debt in ten or thirty years when rates are low. can be much higher?

We decided to ask Norma Cohen, formerly of the FT and currently a researcher at Queen Mary University, who has written twice for us about the relevance of the situation after WWI to the current situation. (See here and here.)

Here’s what Norma had to say:

The cost of servicing the debt today, even with the massive borrowing linked to the pandemic, is a fraction of tax revenue compared to the interwar period where the debt-to-GDP ratio was similar to today. ‘hui. In fiscal year 1923/24, debt service amounted to 40% of tax revenue. Today it is single digit. . .

. But the reason I’m in favor of the Consols show is that the lesson of the interwar period is that there is such a thing as the “risk of overthrow”. There is another reason; Longevity risk is becoming a huge risk for both individuals and financial institutions. If the government could borrow from investors, service the debt in full and on time, but avoid repayment of principal after the death of the investor, it could avoid the risk of refinancing part of its borrowings. . This was used not only by Great Britain, but also by Dutch and Italian city-states throughout the Middle Ages. It would be like annuities issued by the government. Maybe insurance companies would buy them as coverage as well.

Annuities from insurers are considered to be poor value for money now because the rates are so low. But government-issued annuities could be more generous because governments have no reserve requirements or marketing, advertising, and selling costs.

V for Victory.

With the Bank of England ready to raise rates, the sooner the government acts, the better. To disagree? Thoughts in the usual place.

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John A. Bogar